Is PPFAS right to value Noida Toll Bridge lower than market price?

The Allahabad High Court made the Delhi-Noida-Direct Flyway toll-free as it feels that Noida Toll Bridge Company Ltd. has collected a surplus of Rs. 578 crores after accounting for operating costs. Naturally, the market reacted to this news and the price fell by about 20% (the maximum that it can fall).

PPFAS mutual fund holds about 2.77% of this stock. It sent a note to investors on 26th Oct stating that

The valuation committee will decide on the valuation of the stock and its effect on the NAV tomorrow by taking into consideration the additional information that will be available in public domain.

In another note issued on 27th Oct, it said,

  • The shares of Noida Toll Bridge Company Ltd were locked in lower circuit today and shares did not trade freely as there were more sellers than buyers.
  • To be conservative, we are marking the price of this security down by two more market circuits i.e. 20% & 10% from today's closing price.
  • Whenever the shares start trading freely on the stock exchanges, we will revert back to the market price method of valuation at that time.

So it valued the stock about 30% lower than its last closing market value.

The impact of the NAV is not significant, but is this within the rules?

SEBI has a mutual fund regulations manual updated 6th May 2014. The 8th schedule in this document refers to valuation procedures (page 90).

Let me quote a few rules:

"The valuation of investments shall be based on the principles of fair valuation i.e. valuation shall be reflective of the realizable value of the securities/assets. The valuation shall be done in good faith and in true and fair manner through appropriate valuation policies and procedures".

"The responsibility of true and fairness of valuation and correct NAV shall be of the asset management company, irrespective of disclosure of the approved valuation policies and procedures i.e. if the established policies and procedures of valuation do not result in fair/ appropriate valuation, the asset management company shall deviate from the established policies and procedures in order to value the assets/ securities at fair value:

Provided that any deviation from the disclosed valuation policy and procedures may be allowed with appropriate reporting to Board of Trustees and the Board of the asset management company and appropriate disclosures to investors".

While those (among others) are the rules, the following are only guidelines!

The securities shall be valued at the last quoted closing price on the stock exchange.

A non-traded security is one that did not trade for 30 days! In such case, they can be valued on "good-faith". The "guideline" is to use market closing price for other securities.

The stock in question is not a "non-traded security". Is it a "thinly traded security"?

The rule here is

When trading in an equity/equity related security (such as convertible debentures, equity warrants, etc.) in a month is less than Rs. 5 lacs or the total volume is less than 50,000 shares, it shall be considered as a thinly traded security and valued accordingly.

In such a case,

Thinly traded securities as clarified in the guidelines shall be valued in the manner as specified in the guidelines issued by the (AMC) Board

Then a discount to the price can be applied. The SEBI rules does allow the AMC board ample elbow space to define valuation rules, but did it jump the gun to not use market price?

At the time of writing Noida Toll Bridge Company Ltd. is neither a non-traded security or a thinly traded security. The only assumption that I can make  is that its board expects the stock to become a thinly/non-traded security and therefore applied a discount to the price.

Is this kind of valuation illegal? No, I don't think so. The rules do allow it. Debatable, arguable, yes but difficult to call it illegal.

Is this kind of valuation unethical? No. For existing investors, it is better to use a discounted price. Those who redeemed yesterday would have felt a small pinch, but that is how the cookie crumbles!

Note: I have merely started the rules in the post and how it allows an AMC board to take such decisions. If you disagree, please quote specific SEBI regulations to let me know if I missing something.

If you have a problem with PPFAS, suggest you use the SEBI SCORES complaint system.

Update:

PPFAS has now sold all its stake in Noida Toll Bridge Company Ltd. says their recent note. Thanks Mahesh MIrpuri for pointing this out.

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3 thoughts on “Is PPFAS right to value Noida Toll Bridge lower than market price?

  1. Kishan

    That timely post. 🙂 I found the move ethical or logical, just didn't know if it was legal or not. Now I know it.

    Perhaps this is the issue with mid cap funds, that we need to be aware of.

    Reply
  2. ajayrajaram

    For the sake of propriety, request you add a disclosure line : invested when reporting about ethics or any other legal aspects in your blog

    Reply
    1. freefincal

      My holdings are not relevant in a post where I quote rules (not ethics) and point out what an amc can or cannot do.

      Reply

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